We systematically document a flight-to-US phenomenon in the global equity market when global volatility soars, using portfolio holdings of globally investing active equity mutual funds with total size of over 2 trillion USD. We find that at the fund-stock level, a fund would on average rebalance to a US stock by 2% of this position relative to a non-US stock contemporaneously under one unit increase of the log VIX index, before reaching its peak of 9.1% after 4 quarters. The rebalance to US is mostly offset by withdraw from the emerging markets. Funds experience better ex-post return by engaging in rebalancing than hypothetically not rebalancing in the short run, but this effect diminishes after 8 quarters. We interpret the empirical findings using a stylized model featuring asymmetric balance sheet capacity between US and non-US liquidity providers that generate a convenience value of US stocks. When volatility rises, mutual funds rebalance to US to lower their potential fire sale cost, thanks to the better balance sheet capacity of US liquidity providers leading to a lower haircut for US stocks.

We study three centuries of U.K. fiscal history. Before WW-I, when the U.K. dominated global bond markets, the U.K.'s government debt was not always fully backed by its future surpluses. As predicted by theories of safe asset determination, investors concentrate extra fiscal capacity in a single country, the global safe asset supplier, based on relative macro fundamentals, and its debt growth may temporarily outstrip what is warranted by its own macro fundamentals. After the relative deterioration in U.K. fundamentals, due to the run-up in debt during WW-I and WW-II, bond investors focused exclusively on the U.K's own macro fundamentals. Since then the U.K. debt has been fully backed by surpluses. 

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs). 

We propose a new international monetary system based on carbon currency (the carbon standard) to tackle two pressing externalities in today’s global economic and political context: the dangerous and irreversible effects caused by unconstrained green-house gas emissions and the cost to the rest of the world as a result of the U.S. dollar being the dominated global currency and the U.S. Federal Reserve increasingly implementing monetary policies not aligned with the global common interest. We define carbon currency as standardized carbon-related securities backed up by the right of one unit of carbon emissions. It can be used as a new global reserve currency and functions as an international unit of account. Through the trading of carbon currency, efficient carbon prices are established. By incorporating the cost of carbon emissions into decision making, carbon pricing provides incentives for countries to pursue low-carbon growth, which helps achieve the net zero emissions global goal set under the 2015 Paris Agreement. Under the carbon standard, the external shocks to the international financial system would come from variations of carbon emissions rather than the U.S. monetary policies. As such, monetary authorities’ commitment to maintaining stable exchange rates comes together with monetary policies aiming at pursuing low-carbon growth. The new system potentially poses a plausible solution to the classical Mundellian Trilemma because the objectives of maintaining fixed exchange rate and implementing monetary policy become one. Although several hurdles are constraining the launch of carbon currency immediately, the carbon standard poses a feasible international monetary system as the world-wide campaign to achieve carbon neutrality progresses.